The Short Version
When your farmland sale closes, escrow sends 3⅓% of the full price to the Franchise Tax Board before you see a dollar. It is a prepayment of your income tax, not an extra tax, and you get credit for it when you file. The elections that can shrink it have to happen before escrow closes, so the time to act is before signing, not at tax time.
When farmland sells in California, escrow does something that surprises a lot of families the first time they see it on the closing statement: it holds back 3⅓% of the sale price and sends it to the state before the seller sees a dollar. On a hypothetical $3 million orchard, that's about $100,000 held back from the proceeds at close.
The instinct is to read that as a tax, another bite out of a transition that already carries plenty of them. It isn't. Understanding what it actually is, and the elections that come with it, can change how a sale is structured and how much cash a family walks away with at close.
What the withholding actually is
California requires withholding on most sales of California real property, and the escrow company handles it. The standard rate is 3⅓% (0.0333) of the gross sale price, not the gain, the whole price. It's reported on Form 593, the Real Estate Withholding Statement, which the seller signs and escrow files.
Here's the part that matters: this is a prepayment of the seller's California income tax on the sale, credited against what's actually owed when the family files its California return. If the real tax bill comes in lower than what was withheld, the difference comes back as a refund. If it comes in higher, the balance is due with the return.
So the 3⅓% isn't an additional cost. It's the state collecting some of the tax early, at close, rather than waiting for the return. But, and this is the practical catch, it's calculated on the sale price, while the actual tax is owed on the gain. For farmland held in a family for decades with a low cost basis, those two numbers can be wildly different, and the withholding can substantially over- or under-shoot the real liability.
The state collects 3⅓% of the price. The family owes tax on the gain. For long-held farmland, those are rarely the same number.
The election to look at before close
Form 593 isn't a single fixed number. The seller can elect an alternative withholding calculation based on the gain actually recognized from the sale, rather than the flat 3⅓% of price.
For an individual or a trust, the alternative withholds at 12.3%, the rate Form 593 lists, applied to the gain instead of 3⅓% applied to the price. Whether that helps depends entirely on the math of a specific sale:
Which method withholds less?
Recently acquired ground, or a sale at a modest markup over basis: the gain-based calculation can withhold far less than the flat 3⅓%, keeping more cash in the family's hands at close.
Decades-held farmland with a very low basis, where most of the price is gain: the flat 3⅓% of price may actually be the lower number, and the standard method is the better election.
There's no universal right answer, and that's the point. The election has to be run against the real numbers before escrow closes, because after the transaction closes, the withholding can only be recovered by claiming it as a credit on the tax return; there's no going back to change the method. This is a decision with a deadline, and the deadline is the close of escrow.
Run the two numbers on your sale
Standard withholding vs. the gain election
Both are prepayments credited against your actual California tax. The difference is how much of your money escrow sends to Sacramento now instead of wiring to you at close.
Educational illustration of the FTB's Form 593 withholding methods, current as of the 2026 instructions: the standard 3 1/3% (.0333) of the total sales price, or the optional gain election at the seller's maximum tax rate (individual and trust 12.3%, C corporation 8.84%, S corporation 13.8%). The election requires completing and signing Form 593 Parts VI and VII under penalty of perjury before close. A fully qualified 1031 exchange through an intermediary is generally exempt from withholding entirely; installment sales withhold 3 1/3% of the down payment plus the principal portion of later payments. This tool assumes one seller who owns 100% and that no exemption applies. It does not cover banks, financial corporations, or non-California partnerships, which have their own rates. A sale at a loss or zero gain is exempt instead, and a seller who knowingly signs a false gain estimate faces a penalty of $1,000 or 20% of the required withholding, whichever is greater. Withholding is a prepayment, not the tax itself. This is not tax advice; your CPA and the escrow holder control the filing. The default uses .0333, the rate Form 593 tells escrow to apply; the statute's 3 1/3% is exactly one-thirtieth, so the two differ by about $33 per $1 million of sale price.
When no withholding is required at all
Several exemptions remove the withholding entirely. The ones that matter most for farmland:
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1
A 1031 exchange already underway. If the sale is structured as a like-kind exchange and a qualified intermediary is holding the funds before escrow closes, the withholding generally doesn't apply, because the gain is being deferred rather than recognized. If the exchange fails, withholding comes back on the full sale price, and cash or other boot over $1,500 is withheld on; coordination matters here.
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2
Sales of $100,000 or less. At or below that total price, withholding is not required. Relevant for small parcels, less so for whole-farm sales. The test is the total sale price, not one owner's share.
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3
Certain entity sellers. A corporation with a permanent place of business in California can be exempt. So can a California partnership, or an LLC taxed as a partnership (not a single-member LLC), that holds title in its own name. How the family holds title, individually, in a trust, in an LLC, affects which exemptions are available, which is one more reason title decisions made years earlier shape the sale.
A critical caveat the FTB states plainly: qualifying for a withholding exemption does not relieve anyone of the obligation to file a California return and pay the tax actually owed. An exemption changes the timing; it doesn't erase the liability. A family that claims the 1031 exemption and then later sells the replacement property in a taxable transaction still owes California its share of the deferred gain.
The trade-offs, named plainly
The withholding itself is neutral: money moves earlier, not money lost. But how a family handles it has real consequences.
Four things that actually matter here
Defaulting to the flat 3⅓% when the gain-based calculation would withhold less means the family's cash sits with the state until the refund arrives after next year's return is filed and processed. On a large sale, that can be meaningful cash tied up for a year or more.
Form 593 must be submitted before escrow closes to change the method or claim an exemption. Miss that window and the only remedy is waiting for the refund; the flexibility is gone.
The 1031 exemption feels like a win at close, but it's a deferral. The California tax is still owed eventually, and a family that treats the exemption as the end of the story sets up a surprise down the road.
Whether the ground is held individually, in a trust, or in an entity determines which exemptions and elections are even on the table when the sale comes. The planning that helps here happens long before escrow opens.
How we coordinate this
We don't fill out Form 593; the seller signs it and escrow files it, with your CPA's numbers. What we do is help keep the withholding decision from being made by default at the closing table. Before a sale, we coordinate with your CPA to run the standard 3⅓% against the gain-based alternative on the actual numbers, confirm which exemptions the family's title structure makes available, and help the family get its chosen Form 593 election signed before escrow closes, while there's still a choice to make.
It's a small percentage on the closing statement. On a large farmland sale, it can also be six figures of the family's money, and how much is withheld at close comes down to a choice the seller makes on Form 593 before escrow closes.
Legacy Land Advisory
Selling farmland, or weighing an exchange, in the next year or two?
The withholding election is one of several decisions that has to be made before escrow closes, not after. We help Central Valley families coordinate the timing so these choices get made while there's still time to make them.
Working with a family as their attorney or CPA? Start here.
Common Questions
California Withholding:
What Families Ask
What is California's 3⅓% withholding? Is it a tax I'm paying twice?
No. The 3⅓% withheld by escrow is a prepayment of your California income tax on the sale, not an additional tax. It is credited against your actual California tax liability when you file your return. If the amount withheld exceeds what you actually owe, the difference is refunded. It's the state collecting some of the tax early, at close, rather than waiting until the following April.
Can I reduce the amount withheld by using a different Form 593 calculation?
Yes, but the election must be made before escrow closes. Form 593 allows an alternative calculation: the seller's maximum rate listed on Form 593 (12.3% for individuals and trusts) applied to the estimated gain, rather than the flat 3⅓% of the gross sale price. Whether the gain-based method withholds less than the flat-rate method depends on the ratio of gain to price on your specific sale. Your CPA needs to run the comparison against your actual numbers before escrow closes.
Is withholding required on a 1031 exchange?
Generally no. If the sale is properly structured as a like-kind exchange with a qualified intermediary holding the proceeds before escrow closes, the withholding does not apply because the gain is being deferred. If the exchange fails, withholding applies to the full sale price. If it completes but the seller receives cash or other boot over $1,500, withholding applies to the boot. The 1031 exemption defers the California tax; it does not eliminate it. The obligation remains and follows the deferred gain into the replacement property.
What if escrow withholds the flat 3⅓% and I think the gain-based amount would have been less?
Once escrow closes, the withholding method cannot be changed. The only way to recover excess withholding is to claim the full withheld amount as a credit on your California tax return and receive the difference as a refund after the return is filed and processed. On a large sale, that can mean six figures sitting with the state for a year. The time to make the election is before close, not after.
Does the withholding exemption apply to farmland held in an LLC or trust?
It depends on the specific entity type and how it is structured. A corporation with a permanent place of business in California may qualify for an exemption from withholding, and so may a California partnership, or an LLC taxed as a partnership (not a single-member LLC), that holds title in its own name. Trusts and individual sellers face different rules. The title structure that was put in place years before the sale, whether land is held personally, in a revocable trust, in a family LLC, or otherwise, determines which exemptions and elections are available at the time of closing. This is one reason title and estate structure decisions have downstream consequences that extend all the way to the closing statement.
Important Disclosures
This article is educational and does not constitute tax, legal, or investment advice. California real estate withholding rules and individual circumstances vary, and the right Form 593 election depends on the specific numbers of a given sale. Coordinate with a qualified tax professional and your escrow or settlement agent regarding Form 593 and your specific situation.